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How To Finance The US Stimulus: Abolish Corporation And Dividend Taxes For One Year

David Cay Johnston provides with a set of numbers over at Reuters. The great joy of this set being that we can now see how to finance a massive stimulus for the US economy without increasing the debt that future generations will have to pay off. We should simply abolish the corporation and dividend taxes on foreign profits repatriated for one year. Indeed, if we were really being serious, we would just abolish all dividend taxes for one year.

This isn’t David Cay Johnston’s conclusion, that’s for sure, but the numbers he provides show that it would be a good one.

IRS data suggests that, globally, U.S. nonfinancial companies hold at least three times more cash and other liquid assets than the Federal Reserve reports, idle money that could be creating jobs, funding dividends or even paying a stiff federal penalty tax for hoarding corporate cash.

The Fed’s latest Flow of Funds report showed that U.S. nonfinancial companies held $1.7 trillion in liquid assets at the end of March. But newly released IRS figures show that in 2009 these companies held $4.8 trillion in liquid assets, which equals $5.1 trillion in today’s dollars, triple the Fed figure.

Why the huge gap?

The Fed gets its data from the IRS, but only measures the flow of funds in the domestic economy. The IRS reports the worldwide holdings of U.S. companies, which I think is the more revealing measure.

OK, let’s take Johnston’s number: $5 trillion roughly. That’s, near enough, 30% of the entire US GDP. And as David goes on to point out companies really do not need to be holding that much cash. It depresses returns to shareholders (for no one is making much in interest on cash these days) and given that much of it is profits earned abroad which are being held offshore in order to avoid (legally, of course) the corporate income tax it’s not even circulating in the US economy.

Johnston then goes on to point out that if we got that cash into the US economy then it would provide a stimulative boost.

Want to motivate companies to put some of those trillions of dollars of idle cash to work creating jobs, paying dividends or sharing the burden of taxes? Call 1-202-224-3121 and tell your senator or representative you want Section 531 vigorously enforced – now – and the offshore loophole closed immediately.

Except of course he wants to use the stick of increased taxes to produce that desired behaviour: that the companies bring that cash back home and get it moving again inside the US economy.

But I’m afraid that doesn’t quite work because of the strictures of Keynesian economics. Yes, certainly, getting that cash back inside the economy will provide some stimulus. But the essence of governmental stimulus is not the amount of money the government spends: nor even what it taxes. It is the difference between those two numbers. It is the borrowing which provides the stimulus. And yet here is Johnston proposing an increase in taxes collected, a decrease in the gap between taxes and spending, as a stimulative measure. No, I’m afraid this does not work.

Yes, we would like to bring the money back but we don’t want to be charging taxes as we do so. Quite the opposite: to maximise the size of the stimulus we’d like to be collecting no taxes at all on this flow of money.

At which point the use of the carrot rather than the stick becomes the obvious move. Simply provide that, for one year only, any and all foreign profits can be brought onshore with no corporate income tax charge. Further, that any such profits brought onshore can be paid out as dividends without incurring a tax charge on the recipients.

Now, of course, we will not get all of that $5 trillion. Let’s imagine that only half of it comes back as US corporations really do need to have some money overseas to finance overseas operations. At which point we can see that there will be a $2.5 trillion stimulus in the US economy. Some 15% of GDP or so. And all of this without increasing the Federal budget deficit or the national debt by even one penny. A huge, massive (it’s near three times the size of Obama’s previous attempt at stimulus) boost to the domestic economy at pretty much no cost. All we’ve got to do is agree not to tax something that we’re not going to be able to tax anyway.

We’ll move some trillions of dollars from unproductive overseas accounts into the hands of individual investors here inside the US. They will then either spend or invest it. Sounds pretty stimulative to me and I really cannot see why anyone would oppose it. A 15% of GDP stimulus at zero cost: what’s not to like?

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